The proposed ring fence move would create “uncertainty for investors”, says the British Bankers’ Association.

George Osborne is set to announce that the British banks will be broken up if they do not comply fully with new rules.

The British Chancellor of the Exchequer agreed that the new banking reform bill will set up a ring fence to protect retail banking from riskier investment banking operations, apart from protecting the taxpayer from banking collapses.

Meanwhile, the British Bankers’ Association said the proposed ring fence move would create “uncertainty for investors” while leaving banks with less money to finance businesses. On the other side, Labour party argued that the chancellor and business secretary Vince Cable do not want to leave the threat of full separation hanging over banks.

Insisting that he has always been open to suggestions on making safer banking system, Osborne will accept that majority of them at Westminster do not trust the banks and think they will try to find ways of undermining any ring fence.

According to the Financial Times, Osborne will say: “My message to the banks is clear: if a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether – full separation, not just a ring fence.”

A cross-party parliamentary banking commission headed by Andrew Tyrie, and members including Lord Lawson and Justin Welby recommended the “sword of Damocles” approach in December 2012.

Osborne is not proposing a more general power to apply full separation across the banking industry, he, however, will only give regulators the power to dismantle an individual bank which tries to undermine the ring fence.

Refusing Tyrie’s committee call for tougher leverage rules for banks, the chancellor is interested to stick to the internationally agreed leverage ratio of 33 to 1.